Back to the Future Buffalo Wild Wings

5

Buffalo Wild Wings has been a great growth story and investment over the past decade returning a 7-fold increase on dollars invested. They had a blowout Q2 2014 and first half with 7.7% same store sales increases for the quarter and a 20% increase in restaurant sales. That rivals some of their best years if they stay on that pace for the rest of the year. The share price reflects the excellent first half at $147 just off all time highs around $160. The stock “plunged” 13% after earnings even with guidance of 25%-30% increase in net for 2014. That doesn’t compare favorably to the 58% in net growth in the first half. Apparently the street was expecting more. The “plunge” doesn’t seem like a great buying opportunity. I would be looking for a little bit more of a swan dive off the 30 meter board. What I sincerely wish is that I had looked at them more seriously a few years ago. The concept has always had appeal and strong focused management. Who doesn’t like wings beer and sports? But for whatever reason, they never made it on to my to do list.

Make no mistake Q2 2014 and the first half were great and the current price reflects that.

Looking at Q2 shows accelerated growth and comps compared to 2013 It’s no mystery why shares reached record highs this year – 2013 was good but not stellar. Annual growth since 2008 in the high 20% to low 30% is impressive and until 2013, comps in 2011 and 2012 of over 6% are good ( fell off to 3.9% in 20130. The return of high single-digit comps in 2014 fueled investor enthusiasm for shares. In Q2 2014, 2.6% of the 7.7% same store sales increase was from price and 5.1% was traffic. The high traffic is another positive for the quarter.

The first half of the year benefited from a fair number of major sporting events that came together opportunistically for a bar specializing in sports. During the first half of the year, Buffalo Wild Wings hosted beer and wings for the Winter Olympics, NBA finals, the FIFA World Cup, and the Super Bowl. There will be fewer global sporting events scheduled in the second half and comps are expected to slow down.

High same store sales along with growth are critical if you are going to pay a premium for shares. CMG just came in with a numbing 17% increase in comps and the premium on shares is the result. To invest we have to hope Q2 for BWLD wasn’t an anomaly but is the wave of the future.

Growth is almost equally as important and runs in tandem with rising comps. Store growth is good but new stores that don’t pull their weight are an efficient way to grow. To monitor new store efficiency, I check average unit volumes (AUV). 2013 was up 5% over 2012 from $2.8 million to $2.9 million.

Growth, comps, increasing average weekly and annual sales all check out making BWLD a convincing growth story. Margins are less than Chipotle and Panera. BWLD is comparable to BJRI. BWLD doesn’t have the best margins in the industry. Costs are likely creep higher as more “guest captains” are hired. Occupancy costs are in line; labor costs are a bit on the high side. While franchises have excellent margins, at just 6% of revenue, they don’t have much impact on the bottom line. In order to make franchises pay, you have to be committed like Mickey D’s tens of thousands of franchises. Going forward, franchise revenue isn’t going to have much to do with the final outcome.

Where to from here

The company gives specific guidance for growth over the next 7-10 years. In the US they plan to reach 1700 total including company owned and franchises. At present they have 448 company Wings, 1 Pizza Rev and 579 franchises for a total 1028. In the US, unit growth over the next 7-10 years will be 40% with 672 units to go to get to 1700. At current ratios, that’s 54% company and 46% franchisee or 918 company stores and 782 franchise stores when they reach 1700. Form these projections it’s possible to estimate what revenue might look like under a few scenarios that include different rates of growth for average unit sales.

BWLD gets 5% of franchisee revenue and has net margins that stay between 5.5%-6.4% over the past few years and with that you can make some guesses about revenue and earnings at the end of expansion. None of these include the projected move into Pizza Rev and Rusty Taco stores. IMO those are unknowable. My impression is the company is seeing the back half of growth in the core concept and is reaching for a way to start over and put the Wild Wings magic mojo on a new concept. Generally it seems like brand diversification is not successful.

None of these include the 900 estimated diversified concepts. All 400 international units are counted as franchises per the company.

If BWLD keeps AUV in the 5% growth range, and if it continues to trade at a high premium in the future, then today’s price isn’t unreasonable. Revenue and EPS (assuming flat share count) would increase more than four-fold . Over the last decade it increased around six-fold but that was the first half of the growth cycle and we are now in the second half at 40% left. Their record is good for the last decade and growth while in the second half should equal the first half in number of units built. Will the concept of alcohol and wing fueled well times watching big screen sports continue to bring in the crowds over the next 10 years? Seems likely. Will the path to the end game be a smooth trajectory supporting current valuations? Probably not.

From an analyst:Analyst John Glass further explained factors keeping Buffalo Wild Wings at Equal-weight. First, the restaurant is two-thirds penetrated in North America, limiting growth. Other factors include industry uncertainty and margin pressure.

“A sharp fall off in new store productivityy would underscore our maturation argument and cause shares to be rerated downward again, making the upgrade premature. Conversely, sustained SSS momentum, or incremental franchise acquisitions beyond that which was recently announced would cause our current forecast to be too conservative,” wrote Glass.

Seems almost too logical and obvious, but that’s what it comes down to—high comps, increasing AUVs that show consumer interest in all locations and no cannibalization and faster growth of company stores than franchises. The observations do give us excellent guidelines for numbers to watch and if we don’t want to buy near record highs we can hope for some bad news at some point making a more meaningful correction than the last one.